Why landlords are raising their game on office amenities

Today’s landlords are increasingly aware that incorporating high-quality space for collaborating and socializing in their office buildings is a better way to catch the eye of companies hunting for new premises.

July 26, 2018

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JLL Staff Reporter

Basement gyms and 9-5 cafés alone no longer have the same pull factor for companies looking for office space that they had 10 years ago

Today’s landlords are increasingly aware that incorporating high-quality space for collaborating and socializing in their office buildings is a better way to catch the eye of companies hunting for new premises.

The efforts come at a cost, but the results can be an investment. In Sydney, The Porter is a club lounge in Lendlease’s 1 O’Connell Street building with a central ‘chalet’ and fireplace, among casual seating areas and meeting rooms.

Meanwhile, global investment manager AMP Capital has recently undertaken numerous lobby refurbishments throughout its portfolio, which have all created alternative workspaces for tenants.

“We have actually expedited some capital projects because we recognise the changing nature of the way our customers use buildings and the demand for alternative places to work,” says Hamish Stuart, AMP’s Head of Office Leasing.

At the company’s Quay Quarter Tower development in Sydney, up to two floors will be given over to flexible space, which will be paid for by tenants on an as-used basis. Their core space will be reduced as a result of the amenity.

Landlords think flexibly

For many landlords, notorious for their rigid leasing practices, this is new ground. Up until recently, co-working companies had been driving the market when it came to providing workspaces that resonate with employees in terms of design and employers in terms of managing their space needs. But blanket demand is forcing almost every building owner to rethink design and amenities.

“There is a genuine acceptance from building owners that the responsibility of the communal space component of buildings is being transferred to them from the tenant,” says Stuart Colquhoun, head of leasing in Victoria for JLL Australia.

“They have been off the hook over the past five or so years because companies that have required flexible space to meet their changing requirements have turned to third party coworking providers.

“But tenants are increasingly recognising that they have no fallback if those spaces are full, or unavailable, and they’re saying ‘where is the space my landlord controls? How can I leverage the relationship with my landlord so there is always flexible space there for me when I need it?’”

Seeing landlords in a different light

Although flexible is in growth mode across Asia Pacific, according to JLL report Spotting the Opportunities: Flexible Space in Asia Pacific, there is, so far, little evidence of landlords successfully capitalising on the strategy of creating their own flexible spaces. Yet it is early days – and a positive indicator comes from UK-listed company Great Portland Estates, which reported a 35 percent premium over the net estimated rental value on the flexible leases it has been trialling on its London portfolio since early 2018.

While the financial viability of these spaces is understandably crucial for building owners’ balance sheets, there is a bigger prize at stake: securing the best tenants.

But tenants don’t want flex space in isolation. They want the full suite of innovative design and sustainability features, that, until recent times, they were instigating themselves within their core space.

As Colquhoun points out, tenants no longer want the responsibility of a town hall space that they are only going to use once a month.

“The advent of coworking, and short-term flexible space, has put the expectation on the building owner to provide that space, and if a tenant on another floor requires it for a different purpose, then a landlord must ensure their fit-out is adaptable enough to cater to that too.”

Community inspiration

As the tables turn, building owners are actively seeking ways to deliver prospective tenants a differentiated product.

For some, this includes outdoor spaces that incorporate the surrounding precinct, having the effect of anchoring tenants into the neighborhood. Charter Hall’s Wesley Place development in Melbourne, for example, incorporates a new office tower, public courtyard, and a cluster of historical church buildings, which will be restored for community use.

Other developers take inspiration from what is lacking in the community to incorporate into their design innovations, such as a retail tenancy that acts as a restaurant in the evening and a third space for workers throughout the working day.

Plumping for this level of modern, sustainable design delivers tenants the proven benefits of increased productivity, improved wellbeing of staff, reduced levels of absenteeism, reduction in outgoings, and an increased ability to attract talent.

Landlords can then cash in their dividends in the form of increased rents, decreased vacancy and stronger tenant covenants.

“Ultimately, the relationships that landlords develop with their tenants in one city will translate to other cities and enable them to become tribal customers, true partners across a landlord’s portfolio,” says Colquhoun.